Asset tokenization is transforming the way investments are made. This innovative way of doing business offers security, speed, transparency, and accessibility to transactions.
Throughout tokenization, assets go through a process of fragmentation, which transforms an entire asset into digital fractions so that they can be easily traded. Undoubtedly, this new concept is changing the way people deal with investments. So, if you have thought that it’s a great idea to purchase bitcoin, we invite you to see the areas where its blockchain tech could have a profound impact.
What is the Importance of Tokens? – An Introduction
In essence, the term “assets” refers to everything that has value and can be traded and converted into cash. Nowadays, most assets can be tokenized, which facilitates trading and boosts profitability.
A tokenized asset is an asset that is digitally represented in pieces in the form of tokens.
Tokens are digital representations of parts of an asset. They can represent both tangible assets (e.g., real estate developments, vehicles, etc.) and intangible assets (e.g., patents, cryptocurrency, digital art, etc.).
To illustrate this concept, let us utilize an example. So, imagine that there is a property valued at $1 million and it is fragmented into 10,000 tokens.
In this case, each token is worth $100 and you decide to purchase one of them. So, imagine that this property is later sold for $3 million. Accordingly, your token would be worth $300 due to appreciation and you would receive the due return.
Undoubtedly, tokens have plenty of advantages, especially as they benefit both issuers and investors by increasing asset liquidity, facilitating access to assets, and reducing costs involved in trading.
Tokenization for Next-Level Business Performance – Use Cases
Currently, the most popular use cases for tokenization are in the real estate business. Fortunately, executives and entrepreneurs involved in the niche already acknowledged the potential of tokenization to reinforce their businesses.
The main benefits of tokenization regarding the real estate market are the introduction of far-reaching liquidity solutions, as well as upgraded cost-efficiency aligned with flexibility for investors and buyers.
Art, Collectibles, and Gaming Items
Typically, the market of fine arts has several entry barriers, such as expensive prices, access limitations (e.g., private auctions, gallery visits, etc.), large ticket sizes, and other issues that decrease liquidity and reduce the reach. The price of art can largely surpass the crypto prices of the principal cryptocurrencies such as BTC and ETH.
The rise in the popularity of Non-Fungible Tokens (NFTs) is one of the best examples of the power of tokenization to create a profitable revolution by aligning innovative technology and market demands.
Due to the nature of blockchain technology, it is easier to combine it with intangible assets. Indeed, there is no better way to own rights to a specific patent, or access carbon credits in a cloud-based platform than using tokenization.
Nowadays, the rise of tokenization makes it easier to trade and deal with intangible assets, as blockchain-based systems reduce friction and increase trust between both parties involved in a transaction.
Since antiquity, precious metals are considered the supreme representation of value on earth. Currently, they are considered to be fungible assets, as it is possible to replace a gold bar with another gold bar, for example.
Yet, fragmenting a gold bar into smaller blocks is not a good idea, especially as some ounces of precious metal could be lost in the process. Hence, tokenizing a gold bar or any other precious metal makes it easier to trade and even sell shares/parts of the same asset.
There is a heated debate around global warming, renewable and sustainable energy sources, and environmental issues. For example, Tesla CEO Elon Musk took a step back in his Bitcoin adventure due to the high amounts of electricity consumed in the mining process.
Consequently, as traditional energy distribution systems cannot keep up with the increasing demand, tokenization can provide a solution to reduce environmental harm while enhancing transparency and efficiency.
Undoubtedly, many types of funds are not accessible to the average investor. For instance, a hedge fund offering higher returns will typically require $1 million as an investment minimum.
Tokenization reduces the entry barrier by enabling users to exchange shares in a fund within a distributed ledger (blockchain), which increases liquidity in a market that has no access to it.
This way, it enables small and medium-sized investors to benefit from profitable and diversified portfolios designed by investment funds.
Tokenization vs Blockchain Technology – Final Thoughts
Although tokenization has been used for quite a long time by credit card companies and other similar payment services, it was the popularity of blockchain and cryptocurrency technology that brought this concept to the masses.
Nowadays, people can buy tokens representing ownership shares of multiple real-world assets without taking part in a big investment firm. Blockchain technology eliminates the middlemen of the investment process, increasing users’ security and performance in a trustless way.